State regulating bank subsidiaries until ordered to stop, says top bank supervisor

Mississippi’s Department of Banking has returned to licensing wholly owned subsidiaries of federally chartered banks and thrifts and enforcing their compliance with state financial consumer protection laws.

Banking Commissioner John Allison cites the Dodd-Frank Wall Street Reform and Consumer Protection Act as authority for restoration of enforcement powers the state ceded to the Office of the Comptroller of the Currency in 2004. In that year, the OCC issued rules that freed national banks and their operating subsidiaries from any state law that could hamper their ability to make loans and accept deposits.

Dodd-Frank has turned back the clock, Allison said. “Before some of the past OCC regs and court cases trumped our authority, we were regulating and licensing those subsidiaries and I would think we would pick up where we left off,” the commissioner said in an email last Tuesday.

The bulk of the operating subsidiaries targeted for state regulation are mortgage origination companies, according to Allison.

Mortgage originators began migrating to banks as subsidiaries after a 2007 U.S. Supreme Court ruling in Watters v. Wachovia Bank held that subsidiaries of federally regulated banks enjoyed the same protections from state consumer regulations as their parent banks. In effect, they found themselves free to originate loans in a state without having to obtain a state license or adhere to state consumer protection rules.

Now, Dodd-Frank leaves the subsidiaries with the choice of merging with their parent bank or obtaining state licenses and falling under state regulations. “Most of the mortgage operations (in Mississippi) have rolled into the banks,” Allison said

Most of those that haven’t merged have secured state licenses, according to Allison.

In issuing new rules to conform to Dodd-Frank, the OCC conceded Congress wanted to make “wholesale” changes to pre-emption standards. “It clearly did so, as it did by eliminating field preemption for federal thrifts and preemption for operating subsidiaries,” the OCC said.

Allison said the OCC isn’t entirely ready to cede any regulatory authority to the states. “They still think they can” keep the authority to themselves, he said of the OCC regulators.

Thomas Curry, President Obama’s nominee to head the OCC, told the Senate Banking Committee late last month “the actual language in Dodd-Frank is a matter of some controversy. The principle is clear that federal law supersedes state law.”

He said he would not alter the OCC’s longstanding position that national banks it oversees are exempt from more stringent rules put in place by states, especially those regarding mortgages and other consumer products.

Curry’s pledge to “zealously” defend the OCC’s right to preempt state consumer protection laws comes despite a directive by Dodd-Frank for the OCC to revise preemption rules. The directive grew out of complaints from groups representing state attorneys general and bank regulators that the OCC failed to rein in national banks’ lending abuses before the financial crisis.

State banking supervisors, Allison said, have had two or three of the biggest legal settlements to arise from bank mortgage subsidiary irregularities in recent years. The goings-on at subsidiaries of national banking giants like Wells Fargo, Chase or Bank of America aren’t likely to get much attention from the OCC, Allison said.

But if state regulators start getting complaints about one of these subsidiaries, they are unlikely to overlook them, he said. “We look at it at a different level. What we deal with is sometimes more predicated on complaints. If we get two or three of the same thing, it could be an outlier.”

Regulating national bank subsidiaries is now on his daily to-do list, Allison said. “I’m of the opinion that I can until I really get shot down.”

For now, Dodd-Frank “will be the ‘map,’” he added.

Easier, less costly option

National bank and thrift subsidiaries can avoid the time and expense of obtaining licenses in each state by registering with the Nationwide Mortgage Licensing System & Registry (NMLS). Authorized by the Secure and Fair Enforcement for Mortgage Licensing Act of 2008, the web-based system allows federally chartered banks to get a single registration for a mortgage originator that serves as a license to operate in any state.

Allison said he is working with the Mississippi Bankers Association to help get the word out that mortgage originators — whether a part of a bank or a subsidiary of one — must be part of the NMLS.

The deadline is Feb. 29 for all depository institutions, including credit unions and farm credit banks, to have their personnel registered.

The system allows mortgage lenders, mortgage brokers and loan officers to apply for, amend, update or renew a license online for all participating state agencies using a single set of uniform applications.

Of Mississippi’s 71 state chartered banks, all but two are registered in the NMLS, Allison said, and added he expects to get those registered any day now.

State mortgage regulators from around the country developed the nationwide licensing system for the residential mortgage industry and put it into effect on Jan. 2, 2008. They say it is designed to improve supervision of the mortgage industry, streamline the licensing process for mortgage companies and professionals and enhance consumer protection.

Registration gains a mortgage originator a unique identifier number. Without the number, said Allison, Freddie Mac and Fannie Mae won’t process their loans. Freddie and Fannie, under government conservatorship since 2008, provide a secondary market in home mortgages, purchasing mortgages from the lenders who originate them.

The system had 330,000 individuals registered at the end of July, according to Allison.

Passage of a mortgage broker exam and background check is required for licensing and registration.

The Federal Financial Examination Council administers the system. “They are responsible for compliance. We are just a conduit,” Allison said of state bank supervisors.

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